Chancellor Philip Hammond has room for a fiscal giveaway in his autumn Budget. This could well be the reaction to Friday’s public finance numbers. These could show that net borrowing so far this financial year has been well below last year’s £25.5bn, putting the government on course to undershoot the OBR’s forecast of a £37.1bn deficit for 2018-19.
Such a reaction would be silly, and not because it is far too soon to say whether there really will be such an undershoot. At negative real interest rates, the public finances are no constraint on the chancellor.
Instead, the only real barrier to a fiscal easing is that it might add to inflation and hence interest rates. Here, though, we might get good news next week. Wednesday’s data could show that CPI inflation is stable at 2.5 per cent, as higher food prices caused by the drought are offset by a petrol price rise last August dropping out of the data.
Better still, the 'core' CPI inflation rate (which excludes food, energy, alcohol and tobacco) might be only around 1.8 per cent – below target and well below January’s 2.4 per cent rate. And producer price data might show a drop in both input and output price inflation thanks to the recent fall in commodity prices.
The Bank of England, however, thinks the economy is growing sufficiently quickly to add to inflationary pressures. Next week will show evidence of such growth. The CBI is likely to say that manufacturing output growth and order books are still strong – albeit not perhaps quite as much so as in the spring. And official figures should show that although retail sales volumes fell in August, they are around 2.2 per cent up on a year ago. That will remind us that retailers’ problems are not simply a lack of demand.
In the US, meanwhile, we’ll get mixed news from the New York and Philadelphia Federal Reserves. The former might report ongoing strong growth, while the latter might report a slight slowdown. Both, though, will show business optimism around its post-2010 average, which points to continued decent growth.
The housing market, though, might be weakening. Housing starts and permits, and sales of existing homes, might all be weaker than in the spring. This is not yet cause for concern. But it might become one. It was, remember, the slowdown in the housing market in 2006-07 that eventually led to the 2008 crisis.
